The terms mergers and acquisitions often appear together, making people think these are the same or very similar. Although these terms have some similarities, they have key differences. If you’re wondering, “How do mergers and acquisitions differ?” read on for the answers.
Dissecting Mergers and Acquisitions
Breaking down each of these terms can provide a better understanding of their meaning.
What Is a Merger?
A merger is the result of two companies merging to become one. The two companies consolidate their businesses into one new entity. The CEOs of each organization will have equal power and stock in the new entity.
Mergers of two equal companies don’t occur often because CEOs must give up a degree of power. Furthermore, consolidating eliminates the current companies’ stocks, and new ones are issued. From the perspective of a stakeholder, there are not as many benefits to a merger.
However, there are still some good reasons to consider a merger. Some companies decide they can expand their market much more effectively. Other mergers result in lower operational costs, making both more profitable. If the overall bottom line gets a boost by consolidating, then CEOs are willing to make a compromise.
Mergers are usually friendly in that both parties agree to the action and terms of the consolidation. In most cases, the two companies bring equal value to the table.
What Is an Acquisition?
An acquisition is different from a merger in that one company takes over or acquires another. Acquisitions may have negative connotations and require significant amounts of cash to obtain the other party in full. The buyer will have absolute power. The acquiring business takes over all of the management decisions and operational actions.
In an acquisition, the acquiring company remains and the other ceases to exist or operates under the umbrella of the new owner. The acquiring business absorbs the assets, debts and all concerns of the other company.
Some of the reasons for an acquisition include the following:
- You want to buy out the other company’s suppliers to improve economies of scale.
- You want to boost profits by being able to lower the costs per unit as economies of scale increase production.
- You want to improve your market share.
- You want to expand into a new product line.
- You want to have access to the technologies the other company has.
Types of Mergers
Companies can structure their mergers and acquisitions in various ways. Here are some common categories of mergers and acquisitions.
Horizontal Merger
This consists of a consolidation between two companies that are horizontally positioned, thus in competition with each other. These companies share the same product lines and markets. It’s vital to consider that when this type of merger occurs, it can impact the market by reducing the number of companies offering that product or service. This may allow the company to raise prices. However, it could negatively affect the consumer by creating a monopoly and because they will have fewer options.
Vertical Merger
This consists of a company merging with one of its suppliers. For example, a heating and cooling company may merge with a furnace supplier. This type of union can be beneficial because it reduces the extra steps and costs companies take to obtain and distribute their products.
Congeneric Mergers
This one involves two businesses that are serving the same customer base but in different manners. For example, a cell phone manufacturer and a wireless phone company.
Market-Extension Merger
This type is for joining companies that sell the same products but work in different markets.
Product-Extension Merger
This consolidation happens when two companies have different products but are related to the same market.
Conglomeration
This is when two companies don’t have any common business areas. This type of merger is more complex and needs to be thought through carefully. Since the companies don’t have common business areas, companies must think about how merging will be a productive course of action.
How Do Mergers and Acquisitions Differ?
One difference between acquisition and merger transactions is with a merger, one new company emerges after the transaction. Meanwhile, with an acquisition, no new entity is formed; one company takes over another.
You may be asking yourself, “How are strategies different for mergers vs acquisitions?” The specific M&A strategy a company utilizes will depend on what type of merger or acquisition they choose. The company needs to assess its main end goal, the market, and what resources they have to work with.
Remember, an acquisition costs significantly more than a merger. By evaluating these factors, CEOs can implement the best strategy and decide which route works best for their company.
Choosing the Right Path for Your Company with Expert Advice
Now that you know more about the differences between mergers and acquisitions, you can move forward to making the best decision for your company. At Confie, we are proud of our strong record of successful mergers and acquisitions.
We are positioned to work with your company to find a solution. With our well-established personal lines insurance company, you can be assured of success. Get in touch with one of our lead experts for more details. Contact us today or call us at (714) 252-2500.
